What’s happening with the replacement of JIBAR?

By Alex Cullinan

The discontinuation of the London Interbank Offered Rate (“LIBOR”) for Sterling has been set for 31 December 2021,1 but the situation regarding the replacement of the Johannesburg Interbank Average Rate (“JIBAR”) is unclear at this stage.

In November 2020, the Deputy Governor of the South African Reserve Bank (“SARB“) confirmed that JIBAR would cease ‘at some future point’ and that South Africa would transition to alternative reference rates. Current expectations are that JIBAR may cease in 2024and that the replacement benchmark will be the South African Rand Overnight Index Average (“ZARONIA”),which is an unsecured overnight rate.

What are the implications of this for:

  • New ZAR loans?
  • Exiisting ZAR loans with a tenor beyond 2024?

Firstly, any existing loan agreements that extend beyond 2024 will need to incorporate a fall-back position for when JIBAR is discontinued, and lenders and borrowers will need to start considering this.

Secondly—and in accordance with global trends—new and refinanced loans should reference risk-free rates (“RFRs“). For those loans still referencing LIBOR, the recommendation is to include conversion mechanics or, if not viable, robust fall-backs. However, whereas the Working Group on Sterling Risk-Free Reference Rates has recommended that the replacement RFR for sterling-based loans is the Sterling Overnight Interbank Average Rate (“SONIA“), no such recommendation currently exists in the South African market as to the replacement RFR for ZAR-based loans, and it is therefore not possible at this stage to hardwire the terms of the JIBAR replacement language.

One of the options made available to facilitate the conversion of LIBOR to SONIA or other alternative rates was the pre-agreement by the relevant loan parties in the loan agreement to renegotiate LIBOR to non-LIBOR alternatives at the appropriate time. During 2020, the Loan Market Association (“LMA“) recommended changes to the ‘Replacement of Screen Rate’ language in its standard-form loan agreements, which contemplated a pre-agreement by the parties to enter into negotiations to agree a ‘Replacement Benchmark’ upon the occurrence of a ‘Screen Rate Replacement Event’ (the cessation or non-representativeness of LIBOR constituting such ‘Event’). This ‘Replacement of Screen Rate’ language should similarly be reflected in ZAR-based loan agreements, with the cessation of JIBAR triggering the ‘Screen Rate Replacement Event’. This option is not as watertight as the LMA’s ‘Rate Switch Agreement’, which incorporates pre-agreed conversion terms and therefore minimises the risk of unsuccessful negotiations at the time of conversion, but it is the best option available for JIBAR replacement language at the moment.

Going forward, ZAR-based loan agreements will need to reflect a combined approach: on the one hand, recognising that JIBAR will remain the reference rate until further certainty as to its official replacement has been confirmed by the SARB and, on the other, that JIBAR will ultimately cease as the reference rate in 2024 (or at a later date, as confirmed by the SARB), at which point the loan parties will need to be ready to negotiate the terms of its replacement.

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